Banks' work on school bond elections targeted

April 25, 2013

Updated Aug. 21, 2014 11:20 p.m.

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Borrowing through capital appreciation bonds is helping to pay for a 600-seat Performing Arts Center at El Dorado High in Placentia. The expensive bonds, which delay payments for decades, were sold by Placentia-Yorba Linda Unified officials after voters approved Measure A in 2008. JEBB HARRIS, ORANGE COUNTY REGISTER

Borrowing through capital appreciation bonds is helping to pay for a 600-seat Performing Arts Center at El Dorado High in Placentia. The expensive bonds, which delay payments for decades, were sold by Placentia-Yorba Linda Unified officials after voters approved Measure A in 2008. JEBB HARRIS, ORANGE COUNTY REGISTER

If your school district wants to issue bonds to pay for new classrooms, it shouldn't let an investment bank run the political campaign aimed at convincing voters to authorize them.

That's what a growing number of critics are telling the dozens of California schools that have hired political strategists from banks and other financial firms to quietly work behind-the-scenes to win votes for bond measures.

The schools and financial companies are facing increasing scrutiny and regulation in Sacramento and Washington since a Register story in February detailed how one Orange County district hired a bank's political experts to pass a 2008 bond measure. That district, Placentia-Yorba Linda, then paid the bank nearly $2 million in fees – an amount nearly twice the national average – to underwrite the bonds that voters approved.

A bill introduced by Assemblyman Don Wagner, R-Irvine, would outlaw the most egregious bond election deals. Meanwhile, in Washington, regulators have ordered the banks to reveal more details about their political work for schools and other municipalities. Earlier this year, state Treasurer Bill Lockyer asked the California attorney general to investigate whether deals similar to that between Placentia and George K. Baum & Co, a Midwestern investment bank, violated the law.

Wagner said he worries schools are getting locked in to agreements that result in them paying too much in fees to the financial firms and excessive interest rates on the bonds.

"There appears to be a conflict of interest," he said.

His bill would make it illegal for schools to hire banks or financial advisory firms to work on bond election campaigns, and then later pay those same companies for financial work as the bonds are sold.

While these deals have largely escaped voters' notice, they have become common in California school bonds elections. Some banks and financial firms aggressively promote their political services to school boards.

Critics of the financial companies' political work in bond elections, including the California Association of County Treasurers and Tax Collectors, have been trying to stop the deals for years. They say that the firms have a troublesome financial incentive when they work for the school both before and after the election. The fear is that executives will steer the schools into taking on more debt than they can afford because the firms often receive more fees for each dollar in bonds issued.

Such a case is now being litigated in court. A small school district in Mendocino County, Willits Unified, is suing Caldwell Flores Winters Inc., a financial advisory firm, for fraud. Willits officials claim the firm's executives misled them by urging them to get voter approval for an excessive level of debt. Caldwell was motivated to commit the fraud, the school claims, because its agreement with the school paid the firm more fees if voters approved more bonds. Willits sued Caldwell after the firm first filed a lawsuit against it, attempting to collect more fees.

Caldwell executives didn't respond to repeated emails and phone calls from the Register.

Wagner's bill is opposed by some school districts. They argue that it would hurt small, poor and urban districts that depend on the financial firm's full range of services.

State law already bans school districts from using public money to hire political consultants to work on bond elections. But many school districts have disregarded the law or tried to find a way around it.

California school bond elections are also getting scrutiny in Washington. The federal agency that regulates bond underwriting firms recently obtained approval to force banks to disclose more information about the cash and political services they provide to bond election campaigns.

Under the Municipal Securities Rulemaking Board's new requirements, banks must describe details of the services they provide to a bond election. They also must report the value of those services as an in-kind contribution to the election campaign.

Lynnette Kelly, the board's executive director, said officials plan to use the information to track whether schools and municipalities get fair deals from the banks that contribute to bond election campaigns. For example, she said, the board plans to look at whether banks that contribute to the campaigns are later paid higher than normal fees.

"We won't hesitate to take action if there is a quid pro quo or the issuer is being harmed in any way," Kelly said.

The new disclosure requirements were opposed by the Center for Competitive Politics, a conservative group that fights against laws regulating campaign money. The center argued that the rules raised constitutional concerns and imposed recordkeeping burdens on the banks.

A myriad of groups wrote letters supporting the new rules, including at least two banks, Barclays and Morgan Stanley. Barclays urged the board to go even further by banning banks from later working as underwriters on bond deals if they had contributed to the election campaign.

In its letter, Barclays said the board had raised legitimate concerns about banks giving to bond campaigns, which "reflect poorly on our industry as a whole."

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